Newsmaker: Course corrections at IBM server group

Bill Zeitler may have revived IBM's dominance in the server market. But after last quarter, it's clear he still has some work to do.

In nearly six years as leading IBM's systems and technology group, Zeitler helped restore Big Blue's crucial mainframe business, embraced Intel chips and Linux as competitive weapons, launched the industry's top blade server design, and led its Unix systems from a distant third place to the top spot in 2005.

But the first quarter of 2006 wasn't so hot for IBM's servers. Mainframe revenue shrank 2 percent and Unix server revenue declined 6 percent, according to Sanford C. Bernstein analyst Toni Sacconaghi. IBM's Unix business slumped at the same time that previously down-and-out rival Sun Microsystems couldn't keep up with demand for its newer models. Not only that, but IBM delayed its upcoming Power6 processor into 2007.

Zeitler, 58, is preparing his counterattack, though. IBM will cut Unix server prices Tuesday, he said. IBM on Thursday launched a new midrange mainframe in China in an attempt to hook a whole new market on the powerful but pricey machines. And in the longer term, Zeitler sees strong potential for servers using Advanced Micro Devices' Opteron processor.

Mainframes--systems with powerful communications ability, flexibility and reliability--had been given up as a relic from an earlier age, but IBM has rejuvenated the line. Its new mainframe, called the System z9 Business Class (BC), is the cheapest mainframe so far. In May it will be available with the z9 Integrated Information Processor, or zIIP, which lets customers run IBM database software without incurring per-processor charges for other software.

To reinforce its mainframe modernization and market expansion, Big Blue announced a new Shanghai mainframe development lab working on Linux and other technologies. Zeitler talked about the venerable servers and other priorities in a meeting with CNET News.com's Stephen Shankland.

Q: Could you talk about the new midrange mainframes coming out?
Zeitler: We're announcing the new system z9 business class mainframe. It brings all of the security, reliability and scale of our traditional mainframe products to a new class of small and medium enterprises at the lowest entry point we've offered.

Q: What is that entry point?
Zeitler: Well, it's about $100,000. That's considerably below where you would have been able to buy a mainframe traditionally.

Q: I suspect they probably aren't too much less expensive to manufacture. So what's the rationale for lowering the price?
Zeitler: In fact, the Business Class processors are, from a cost standpoint, better positioned than the traditional z9 processors. We want to be able to offer both midmarket customers and customers in the emerging markets, who are building out their infrastructures, the same kind of reliability and security that traditional buyers have been able to get--without having to pay an enormous financial penalty to get into this product.

Q: You had some weakness in the mainframe business last quarter. What happened there, and will the new business-class products help fix that?
Zeitler: One thing that happened is we didn't close as many large transactions as we had anticipated. We had some particular weakness in the Americas. Beyond that, though, I think that the important point is that we've grown revenue three of the last five years...I expect with the product offerings and some adjustments we've made in our sales approach, we should be able to get this thing back on track going forward.

Q: The other soft part of the quarter was pSeries--the Unix market. You managed to get the top spot in the Unix server market in 2005 in terms of revenue. What happened, and what are you going to do to fix that?
Zeitler: I think you could fairly well say we shot ourselves in the foot with pSeries in the first quarter. Much of it was around the introduction of our new Power5+ (processor) family of products. Any time you introduce products at the low end that have very strong capabilities, you have some susceptibility to cannibalizing products above them, and that's what happened...We have made some changes relative to that...and I think we'll be in good shape.

I don't have any doubt that the new (mid-range Unix servers) are extraordinarily strong technically. We just didn't do the job we needed from marketing and sales positioning.

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